Why Stan Druckenmiller Is Right About the Bond Market–and Warsh Knows It

“The long-term Treasury yield is the only fiscal disciplinarian the U.S. has left,” said Stanley Druckenmiller. (Michael Nagle/Bloomberg)

Key Points

• Stanley Druckenmiller criticizes Treasury Secretary Scott Bessent’s efforts to lower long-term bond yields through targeted buybacks.
• Bessent recently doubled the size of Treasury bond buybacks to $4 billion as long bond yields reached their highest levels since 2007.
• Druckenmiller argues that the only real solution to rising yields is deficit reduction rather than Treasury intervention.

Treasury Secretary Scott Bessent’s attempt to browbeat the long end of the U.S. bond market, through a mixture of targeted buybacks and broader criticism, has drawn a stern reply from one of his earliest mentors.

It also has created a new headache for Federal Reserve Chairman Kevin Warsh.

Stanley Druckenmiller, billionaire founder of the Duquesne Family Office but a former mentor of Bessent’s when the pair worked for Soros Fund Management in the early 1990s, penned an op-ed for The Wall Street Journal that attacked his former pupil’s effort to tamp down yields and engineer discipline in the world’s largest bond market.

“Let the bond market speak,” Druckenmiller wrote. “The long-term Treasury yield is the most important price in the world [and] the only fiscal disciplinarian the U.S. has left. Governments defending prices against fundamentals always lose.”

Druckenmiller’s comments followed last week’s move by Bessent to double the size of Treasury bond buybacks to $4 billion as long bond yields touched the highest levels since 2007 and 10-year notes moved closer to 5% that markets have deemed central to the government’s fiscal ambitions.

The moves came amid news that overall U.S. debt topped $40 trillion, an all-time high that has doubled in less than a decade, while yields at an auction of 30-year paper hit the highest levels since 2001.

The government also is running persistent annual deficits with this year’s tally expected to top $2 trillion, around 6% of GDP, and next year’s total forecast in the range of $2.1 trillion.

His views on Bessent’s bond market tinkering are likely shared by Warsh, who has worked closely with Druckenmiller after leaving the Fed in 2011. Warsh is preparing for a gathering of the central banking elite later this week in Jackson Hole, Wyoming.

Warsh has stressed repeatedly that he thinks monetary policy works better when markets are focused on signals from the real economy as opposed to guidance from Fed officials.

That might sit fine with Warsh, who told a meeting of central bankers in July that markets were effectively working things out on their own. But now that Bessent has laid his cards on the table, in terms of a desire to lower long-bond yields, that task is now hugely complicated.

If Warsh opts to continue with his view that markets should dictate Fed action, based on economic and government data, he’ll have to accept that the picture is now distorted by the Treasury’s intervention.

“Warsh has basically told us that he both wants the market to have more of a say in setting the cost of capital, and he wants to shrink the size of the balance sheet and the Fed’s footprint in the market,” said Peter Boockvar, chief investment officer at One Point BFG Wealth Partners.

If he decides to offer more detailed forward guidance on interest rates, however, or the Fed’s reaction function, he’ll be seen as having changed his views based on government action.

Warsh’s highly-regarded independence as Fed chairman also will be called into question.

“Warsh has ground to make up after his July press conference failed to articulate a coherent strategy for ensuring inflation returns to target and hit his credibility,” said Krishan Guha, head of economics and central bank strategy at Evercore ISI.

“But the recent surge in bond yields, and Bessent’s failed effort to reset them, present new complications,” he added.

Druckenmiller also noted that even with mounting debt, quickening inflation and rising yields, the bond market has been working efficiently, allowing the government to “fund itself at roughly the rate its economy grows.”

“Historically, that configuration is accommodative, not restrictive, of financial conditions,” he said. “The bond market wasn’t being a vigilante, as some would argue. It was being a pushover that had finally begun to clear its throat, and Treasury moved to quiet even that.”

Such moves, he argued, are worrying in a market where “every basis point of artificial yield suppression is a subsidy to procrastination” on debt and deficits by the government.

It’s likely too early to tell if Bessent’s moves have had a real impact.

Longer-term Treasury yields were modestly lower Tuesday, with 30-year paper changing hands at 5.212%, and 10-year notes trading at 4.681%, with both levels south of last week’s pre-Bessent announcement.

But yields have been largely tracking global crude prices, which have fallen more than 6% over the past two days as President Donald Trump’s effort to impose crippling sanctions on Iran appears to have fallen far short of market expectations.

At the front end of the curve, meanwhile, 2-year bond yields have popped by around 8 basis points over the past week even as inflation and employment data tamps down expectations of a Federal Reserve rate hike.

Those moves are likely the result of traders pricing in the impact of higher short-dated Treasury bill issuance, needed to compensate for the buyback of longer-dated bonds in Bessent’s new “Operation Twist” strategy.

Such meddling, however, worries Druckenmiller, who sees it as taking “long-term interest-rate risk out of public hands” and running a “small dose of quantitative easing” from the Treasury instead of the Federal Reserve just two months prior to midterm elections.

The real and only solution, he suggested, is likely the most painful, at least in political terms, and well beyond the remit of any Treasury Secretary: deficit reduction.

“The reward is enormous,” he concluded. “A credible fiscal package would do more for the long end of the curve than a buyback program 1,000 times this size.”

But that’s something we won’t see for at least 20 years. Warsh, however, will address the markets in three days. And it will be listening intently.

Write to Martin Baccardax at martin.baccardax@barrons.com

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